What are the differences between tax-exempt and non-profit corporations?

Non-profit status is a state law concept. Non-profit status may make an organization eligible for certain benefits,
such as state sales, property, and income tax exemptions. Organizing as a non-profit organization at the state level
does not automatically grant the organization exemption from federal income tax.

A federal tax-exempt organization is a unique entity that is usually a nonprofit organization.
However, a nonprofit organization cannot be exempt from Federal and State income or franchise tax until the organization
applies for an exemption and the IRS and the state franchise board issues a determination of exemption.

Why form a tax-exempt nonprofit corporation?

Being organized as a tax-exempt corporation is a common requirement for obtaining grant funds from government agencies
and private foundations. Generally, tax-exempt government foundations as well as private foundations and charities are
required by their own operating rules and by IRS regulations to donate their funds only to 501(c)(3) tax-exempt organizations
or else forfeit their own tax-exempt status.

Additionally, only tax-exempt nonprofit corporations provide donors with the incentive of an individual tax deduction
on all donations given to your nonprofit. Additional benefits include, low cost mailing, discounted advertisements, and
other private and governmental discounts.

Does my corporation qualify as a tax-exempt nonprofit?

To qualify for exemption under the Internal Revenue Code, your organization must be organized for one or more of the
purposes specifically designated in the Code. For an organization to qualify under a 501(C)(3) exemption, it must be
organized for one or more of the following purposes:

Charitable

Religious

Educational

Scientific

Literary

Testing for public safety

Fostering national or international amateur sports competition The prevention of cruelty to children or animals

What are the disadvantages of forming a tax-exempt nonprofit?

Your nonprofit income activities will be in most part restricted to the stated purpose of your tax-exempt basis. Income from
sources unrelated to the purpose of the organization will be taxable. If this unrelated income starts to become a substantial
portion of the income earned, this could attract attention from the IRS and prompt a reconsideration of the 501(c)(3) tax-exempt status.

Additionally, you will not be able to benefit from the value of any assets of the nonprofit corporation. All assets of the
corporation must be dedicated to tax-exempt purposes. Upon dissolution of the corporation, all assets must be distributed to
other 501(c)(3) corporations.

Furthermore, payments of dividends to shareholders or payments of profits to directors, officers, members or staff are prohibited,
however reasonable salaries are allowed.

Can a nonprofit corporation make a profit?

Yes. A nonprofit corporation can take in more money than it spends. It can use the tax free profits for its own operating expenses
including salaries. What a nonprofit corporation cannot do is distribute any profits to officers, directors or employees.

Am I required to file both federal and state exemptions?

Although most state tax exempt laws are patterned after the Internal Revenue Code, obtaining state exemption is a separate process
from obtaining federal exemption. Even if an organization has obtained federal exemption, it must follow the procedures of the state
franchise tax board to obtain state tax exemption. In some states, it is possible to obtain state tax exemption before securing
federal exempt status.

How long does it take for the IRS to approve the application?

Our experience is the IRS review period can vary considerably depending on such factors as the uniqueness of the proposed exempt
purpose and the workload of the IRS in this area. The IRS usually issues the exemption recognition ruling in approximately 2 to 6
months, however in most circumstances the recognition of exempt status is retroactive to the date of incorporation.

Is there more than one category of tax-exempt organizations?

Yes. The Internal Revenue Code (IRC) Section 501(c)(3) public charity or private foundation is meant to serve religious,
educational, charitable, scientific and literary organizations, among others. Organizations that are given the status of
IRC Section 501(c)(4)-(27) are tax-exempt, but not charitable. They could be trade associations, social clubs, etc.

If my nonprofit is tax-exempt, do I pay any type of taxes?

If you are a private foundation, you will have to pay tax on your investment earnings and the minimum undistributed grant
allocations, and “unrelated business income.” You will also have to pay federal and state employment taxes, and sales
and/or property taxes.